This Article is written by Mrunal Vijay Kamble, studying at the University of Mumbai, BBA LLB. 4th year during her internship at LeDroit India
Abstract
Debentures and secured borrowings are two of the most significant instruments in corporate finance, shaping the debt structure of companies and influencing investor confidence, governance, and compliance. While debentures represent long-term securities issued to the public, secured borrowings involve collateral-backed loans from financial institutions. Both instruments are regulated under the Companies Act 2013, the Insolvency and Bankruptcy Code 2016 , and allied regulations, with judicial precedents clarifying their scope and enforceability. This article examines the legal framework, comparative advantages, risks, and practical implications of this approach in India, drawing on international practices for reference.
Introduction
Corporate finance forms the foundation of modern business activity, enabling enterprises to sustain operations, pursue growth, and adapt to changing market conditions. Every company, regardless of size or industry, requires capital not only for routine expenses such as salaries, raw materials, and utilities, but also for long-term objectives including expansion into new markets, diversification of product lines, and investment in infrastructure or technology. The manner in which this capital is raised has profound implications for ownership, governance, and risk allocation.
Traditionally, companies have relied on two broad categories of financing: equity and debt. Equity financing involves issuing shares to investors, thereby diluting ownership and distributing control among a wider base of shareholders. While equity provides permanent capital and does not impose repayment obligations, it alters the ownership structure and may reduce the autonomy of existing promoters. Debt financing, in contrast, allows companies to raise funds without surrendering equity control. Debt instruments impose repayment obligations and interest costs, but they preserve ownership and often provide predictable financial planning advantages.
Within the realm of debt financing, debentures and secured borrowings occupy a central role. Debentures are corporate debt securities issued to the public or institutional investors. They may be secured against company assets or unsecured, depending on the issuer’s creditworthiness. Debentures can also be structured as convertible, non-convertible, redeemable, or perpetual, offering flexibility in design and investor appeal. Their issuance is governed by statutory provisions under the Companies Act, 2013 and regulatory oversight by the Securities and Exchange Board of India (SEBI). The requirement of appointing debenture trustees, maintaining a Debenture Redemption Reserve, and registering charges when secured ensures transparency and investor protection.
Secured borrowings, on the other hand, are loans or credit facilities obtained from banks, non-banking financial companies (NBFCs), or other financial institutions. These borrowings are always backed by collateral, which may include immovable property, receivables, or fixed assets. The legal framework under Sections 179 and 180 of the Companies Act, 2013 Requires board approval for borrowings and shareholder resolutions when borrowing limits exceed paid-up capital and free reserves. In addition, the Insolvency and Bankruptcy Code, 2016, grants secured creditors priority in resolution and liquidation proceedings, reinforcing their strong position in corporate debt hierarchies.
The comparative advantages of these instruments are evident. Debentures provide long-term capital without equity dilution, spreading risk across multiple investors, while secured borrowings offer collateral-backed flexibility and lower interest rates due to reduced lender risk. However, both carry inherent challenges: debentures may expose investors to default risk, particularly when unsecured, while secured borrowings may lead to collateral seizure or liquidity strain if companies over-leverage.
Judicial interpretations have further shaped the landscape. Courts have consistently upheld the rights of secured creditors under the IBC, clarified the enforceability of debenture holders’ claims, and emphasised compliance with charge registration to protect creditor interests. Landmark rulings such as ICICI Bank v. Official Liquidator of APS Star Industries Ltd. And Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta Illustrate the judiciary’s role in balancing creditor protection with corporate governance.
This article, therefore, examines the statutory regulation, governance implications, comparative advantages, and judicial perspectives on debentures and secured borrowings. By situating these instruments within the broader framework of corporate law and finance, it highlights their significance in shaping capital structures, investor confidence, and systemic stability in India’s corporate sector.
Definition and Nature
Statutory Definition: Section 2(30) of the Companies Act, 2013 defines a debenture as “debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.” This broad definition ensures that all forms of corporate debt securities fall within its ambit.
Types of Debentures:
Secured vs. Unsecured: Secured debentures are backed by a charge on company assets, while unsecured debentures rely solely on the issuer’s creditworthiness.
Convertible vs. Non-Convertible: Convertible debentures can be converted into equity shares, offering hybrid benefits, whereas non-convertible debentures remain purely debt instruments.
Redeemable vs. Perpetual: Redeemable debentures are repayable after a fixed term, whereas perpetual debentures have no maturity date, functioning as quasi-equity.
Legal Framework
Section 71, Companies Act, 2013:
Requires appointment of debenture trustees to safeguard investor interests.
Mandates the creation of a Debenture Redemption Reserve (DRR) to ensure repayment security.
Sections 77–87:
Obligate companies to register charges with the Registrar of Companies when debentures are secured against assets.
Non-registration can invalidate the security against third parties, though the debt obligation remains.
SEBI Regulations:
The SEBI (Issue and Listing of Debt Securities) Regulations, 2008, govern listed debentures, ensuring disclosure, credit rating, and trustee oversight.
These regulations align Indian practice with global standards of investor protection.
Advantages of Debentures
- Provide long-term funding without diluting equity ownership.
- Offer predictable interest obligations, aiding corporate financial planning.
- Ensure investor protection through statutory priority in liquidation, ranking above shareholders.
Case Law
- ICICI Bank v. Official Liquidator of APS Star Industries Ltd.: The Supreme Court underscored the necessity of registering charges to protect creditor rights, reinforcing transparency in secured debenture issuance.
- Syndicate Bank v. Official Liquidator, Prashant Engineering Co. (1985) 57 Comp Cas 1: Clarified the hierarchy of claims between debenture holders and other secured creditors, emphasising statutory compliance.
Secured Borrowings in Corporate Finance
Definition
Secured borrowings refer to loans or credit facilities backed by collateral such as immovable property, receivables, or fixed assets. Unlike debentures, which are market-issued instruments, secured borrowings are typically negotiated with banks or financial institutions.
Legal Framework
Section 179(3)(d), Companies Act, 2013: Empowers the Board of Directors to approve borrowings.
Section 180(1)(c): Requires shareholder approval via special resolution if borrowings exceed the aggregate of paid-up capital and free reserves.
Insolvency and Bankruptcy Code, 2016 (IBC):
Grants priority to secured creditors in resolution and liquidation processes.
Recognises their right to enforce security interests under Section 52 of the IBC.
Advantages
- Lower interest rates due to reduced lender risk.
- Flexibility for working capital management and project financing.
- Enhanced creditworthiness through collateral backing, improving access to institutional finance.
Risks
- Collateral seizure in case of default, potentially jeopardising company assets.
- Over-leveraging may strain liquidity and increase insolvency risk.
- Restrictive covenants in loan agreements can limit managerial discretion.
Comparative Analysis
A company’s choice between debentures and secured borrowings reflects its strategic approach to debt financing. While both instruments avoid equity dilution, their legal and financial implications differ significantly.
| Aspect | Debentures | Secured Borrowings |
|---|---|---|
| Source of Funds | Raised from public investors through the issuance of debt securities. | Negotiated directly with banks, NBFCs, or financial institutions. |
| Security | May be secured (charge on assets) or unsecured (based on creditworthiness). | Always secured by collateral such as property, receivables, or fixed assets. |
| Cost of Capital | Fixed interest obligations, predictable but sometimes higher if unsecured. | Lower interest rates due to collateral reducing lender risk. |
| Investor/Lender Rights | Statutory protections under the Companies Act, SEBI regulations, and trustee oversight. | Contractual rights under loan agreements, enforceable through security documents. |
| Impact on Ownership | No dilution of equity; debenture holders are creditors, not shareholders. | No dilution of equity; lenders remain external creditors. |
| Risk Allocation | Risk is spread across multiple investors, reducing concentration. | Risk is concentrated with a single or a few lenders, increasing the bargaining power of banks. |
Governance and Compliance
Board and Shareholder Oversight
Section 179(3)(d), Companies Act, 2013: Empowers the Board of Directors to approve borrowings.
Section 180(1)(c): Requires shareholder approval via special resolution if borrowings exceed paid-up capital and free reserves. This ensures that excessive leverage is subject to shareholder scrutiny.
Debenture Issuance: Section 71 mandates the appointment of debenture trustees to safeguard investor interests. Trustees monitor compliance, enforce covenants, and act on behalf of debenture holders.
Disclosure and Transparency
Financial Statements: Companies must disclose borrowings and debenture liabilities in their balance sheets under Schedule III of the Companies Act, 2013.
Registration of Charges: Sections 77–87 require registration of charges with the Registrar of Companies. This protects creditors by ensuring public notice of encumbrances.
SEBI Oversight: For listed companies, SEBI (Issue and Listing of Debt Securities) Regulations, 2008 mandate disclosure of credit ratings, trustee details, and redemption schedules.
Practical Note: Non-compliance with charge registration or trustee obligations can invalidate security interests against third parties, exposing companies to litigation and investor distrust.
International Perspectives
United Kingdom
- Legal Framework: Governed by the UK Companies Act, 2006.
- Debenture Usage: Debentures are widely used, often secured by floating charges. A floating charge allows the company to continue using assets in the ordinary course of business until crystallisation (e.g., insolvency).
- Judicial Development: Cases such as Re Spectrum Plus Ltd. [2005] UKHL 41 clarified the distinction between fixed and floating charges, shaping creditor rights.
United States
- Corporate Bonds: Equivalent to debentures, corporate bonds are a primary debt instrument.
- Regulation: Overseen by the Securities and Exchange Commission (SEC), which mandates disclosure under the Securities Act of 1933 and the Securities Exchange Act of 1934.
- Market Practice: Bonds are often rated by agencies like Moody’s and S&P, with investor protection rooted in disclosure and market discipline rather than statutory trustee requirements.
Comparative Note
- India: Emphasises statutory protection, trustee oversight, and mandatory charge registration.
- UK: Relies heavily on floating charges, giving lenders flexibility but requiring judicial clarity on enforcement.
- US: Depends on disclosure, credit ratings, and SEC regulation, with investor confidence driven by market transparency rather than statutory reserves.
Observation: India’s framework is more prescriptive, ensuring statutory safeguards for investors, while Anglo-American systems rely on market mechanisms and judicial interpretation.
The comparative study reveals that while debentures and secured borrowings serve similar financing purposes, their governance, compliance, and international treatment differ substantially. India’s statutory emphasis on trustee oversight and charge registration reflects a protective approach toward investors, contrasting with the UK’s reliance on floating charges and the US’s disclosure-driven bond markets. For Indian companies, balancing debenture issuance with secured borrowings ensures both investor confidence and institutional lender support, optimising capital structure while maintaining compliance.
Judicial Perspectives in India
Indian courts have played a pivotal role in clarifying the rights of debenture holders and secured creditors under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016 (IBC).
- Secured Creditors’ Priority: Courts have consistently upheld the rights of secured creditors under the IBC, 2016, recognising their statutory priority in resolution and liquidation proceedings.
- Debenture Holders’ Rights: The enforceability of debenture holders’ claims depends on whether their instruments are secured. Secured debenture holders enjoy priority similar to other secured creditors, while unsecured debenture holders rank below in the waterfall mechanism under Section 53 of the IBC.
- Axis Bank Ltd. v. SBS Organics Pvt. Ltd. (NCLAT, 2019): Clarified that secured creditors may enforce their security interests independently under Section 52 of the IBC, reinforcing their autonomy in insolvency proceedings.
- Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta The Supreme Court emphasised the commercial wisdom of the Committee of Creditors (CoC), affirming that secured creditors’ decisions in resolution plans cannot be interfered with lightly.
- M/s IFCI Ltd. v. Sutanu Sinha & Ors. The Supreme Court held that Compulsorily Convertible Debentures (CCDs) are to be treated as equity, not debt, under the IBC. This ruling clarified that not all debenture-like instruments confer creditor rights.
- Jalgaon District Central Coop. Bank Ltd. v. State of Maharashtra (2025, SC): The Court ruled that provident fund dues outrank secured creditors under SARFAESI, reaffirming that employee welfare obligations can override creditor claims.
- National Spot Exchange Ltd. v. Union of India (2025, SC): The Court revisited secured creditors’ enforcement rights under the IBC, balancing creditor claims against state attachment laws.
Key Takeaway: Judicial interpretation has reinforced the primacy of secured creditors while also carving exceptions for employee welfare and clarifying hybrid instruments like CCDs.
Risks and Challenges
Debentures:
Risk of default, especially for unsecured debentures that rely solely on issuer reputation.
Ambiguity in the treatment of hybrid instruments (e.g., CCDs) may affect investor confidence.
Secured Borrowings:
Collateral seizure risk in case of default, potentially destabilising company operations.
Over-leveraging can strain liquidity and increase insolvency risk.
Systemic Issues:
Non-compliance with charge registration under Sections 77–87 of the Companies Act.
Misuse of debenture proceeds without trustee oversight.
Inadequate investor protection in cases of unsecured debt instruments.
Conclusion
Debentures and secured borrowings together form the backbone of corporate debt financing in India. Debentures provide structured, long-term capital with statutory safeguards, while secured borrowings offer collateral-backed flexibility and lower borrowing costs. Judicial precedents—from Essar Steel to IFCI v. Sutanu Sinha—have clarified creditor hierarchies, underscoring the importance of compliance and transparency. A balanced mix of both instruments enables companies to optimise capital structure, maintain liquidity, and ensure adherence to corporate governance norms.
References
- M/s IFCI Ltd. v. Sutanu Sinha & Ors., 2023 INSC 1023
- Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2019) 8 SCC 531
- Axis Bank Ltd. v. SBS Organics Pvt. Ltd., NCLAT, 2019.
- Jalgaon District Central Coop. Bank Ltd. v. State of Maharashtra, Supreme Court, 2025
- National Spot Exchange Ltd. v. Union of India, Supreme Court, 2025
- Companies Act, 2013 – Sections 2(30), 71, 77–87, 179(3)(d), 180(1)(c).
- Insolvency and Bankruptcy Code, 2016 – Sections 52, 53.
- SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
